Why all the Federal Reserve activity ?

[Wiregrass Willie]

Except in fun, I don't make regular stock market predictions. There are two reasons for this:

(1) Like everybody else, I have no idea what the market will do.

(2) Unlike a lot of people (too many) I don't charge money to make predictions -- so therefore I have no reason to update my lies and mistakes on a regular basis.

Having said that, I begin to wonder if we may be able to see what could happen to the market in the next month or two.

But let us look at some recent facts that I find troubling. Week before last, the Federal Reserve added money to the banking system on two different days. Last week the Federal Reserve lowered the Fed funds rate by 1/2 a point. This morning the Fed acted three times to add cash to the banking system.

Why all the activity ? Sure the market dropped a much needed 1,500 points recently, but why the Fed panic ? Does the Federal Reserve's Head Shylock fear that a market correction would endanger the stock options of the CEOs of America ? Apparently so.

But after all this activity, the market is down so far today by about 30 points. Normally -- no big deal. But why is it not up after at least 6 actions by the Fed to bring it up further ? Think about it and it's scary. It's only up about 700 points for the bottom --- but it is also 800 points from the high last month. What goes ? Is there something out there far worse than we are told ?

Can anybody recall a time -- in recent years -- when so much Fed activity has been unable to cause the market to rise ?

What happens after all the "little people" have dumped all of their extra cash into this market and are no longer able to support it for Mr Bernanke and the CEOs ?

Reckon maybe the bush will hit the fan ?

I still prefer not to make market predictions. But I think we are going to see some interesting times in the near future.

[Deja Q]

1. Isn't the Federal Reserve Bank a corporation, and not a governmental entity?

But don't worry. Americans are just too lazy. That's the reason. :D

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=1647490&mesg_id=1647490

[Warpy]

4. Not just lazy, uneducated

If we'd all gotten our masters in business administration, we'd all be rich, you know.

[Orsino]

2. Because the government doesn't know what to do. n/t

[Xenotime]

9. They haven't know what to do since 2000

[no_hypocrisy]

3. The banks simply do not have enough money to provide the borrowers

on their day of closing of title. The Fed is "loaning" vast amounts of dollars so the borrowers can still buy their property, but the Fed is also making it known that the Lenders have to be more stringent in lending future mortgages and it won't endlessly loan the banks money.

[porphyrian]

12. Actually, banks create money as it is borrowed.

This is the most important 45 minutes you can spend learning about how money is made:

Money As Debt
http://video.google.com/videoplay?docid=-9050474362583451279

[Blackhatjack]

5. Just my opinion ....

Banks and Mortgage Companies are overextended and their normal source of operating funding was cut off. This caused mortgage companies to suspend lending, and that means either find a new source of funding at higher interest rates and conditions, or find a buyer, or close.

WE are watching mortgage companies close all across the country.

Banks and mortgage companies were relying on marketing subprime mortgages after closing, and now there are no buyers for those bundled mortgages --and the value of the mortgages is declining as people are missing payments or the properties are going into foreclosure.

Bank regulation requires that a certain percentage of cash be held in reserves to cover any anticipated losses, but those reserves are not nearly large enough to cover the losses. THere have been underreported 'runs' on banks, and funds, which were unable to pay in full.

The Fed is actually a private corporation that controls the money supply. THey are making money available to the banks and funds at a a reduced interest rate which they can immediately add to their balance sheets, increase their reserves, and make payments as needed to survive any 'runs' that their customers might create.

The more cash the Fed injects into the Economy, the less each dollar is worth, or in other words it creates inflation.

The problem is that the entities getting most of the low interest rate funds are not sharing those funds with the mortgage companies in trouble, and the available mortgages has not increased which directly affects the ability of people to buy a home.

I believe that the fund injections are designed to keep entities from going bankrupt. However, until the government raises the cap on Fannie Mae lending (which would allow consumers to refinance out of the worst subprime mortgages) there is not going to be any appreciable change in the downward spiraling housing market.

I believe we are in for a long downturn in the market because of all the negatives mentioned above.

[fasttense]

6. The Fed knows this is just the tip of the subprime lending fiasco

Look ahead to see what is coming. October 07 the biggest amount of loans in history will be reset to higher interest rates and cause more foreclosures unless something changes. Then we get a couple more bumps in January 08 and April 08 until it drops to more manageable levels in Sept 08. I think they are trying to head off the inevitable decline when people who hold the foreclosing loans will be screaming for liquidity.

[Robbien]

10. True, except not subprime

Subprime is taking all the blame and it shouldn't. The real culprit is hedge funds. Hedge funds are taking subprime loans and pyramiding them into huge empty betting pools which are worth only what other speculators are willing to pay. Now that everyone is nervous, no one knows what the hedge funds are worth and are worried they are worth zilch.

[cosmicone]

7. They are scared because

of the subprime loan defaults. Rising interest rates on ARMs have been causing defaults at a record pace and more and more of those mortgages are about to go from the subsidized payment to full payment mode over the next few months.

This is having a chilling effect on developers and construction work which are few of the major drivers to the economy. If the consumer confidence tanks in October-November-December, the retailers will suffer badly, causing a massive economic downturn.

The only way to counter it is to lower the interest rates so the ARM payments are affordable and borrowers don't go into default.

The downside is that it will be more difficult to hold the value of the dollar and dollar will slide down further.

[Blackhatjack]

8. Here is the dilemma facing the Banks and Mortgage Companies...

They are stuck holding onto mortgages secured by real estate which they cannot sell to the secondary market, and they don't know the value of because there are no buyers.

The other side of the coin is, they are stuck with mortgages which go into default and foreclosure because people default on the higher reset monthly mortgage payments --and now the original mortgages are worth substantially less because with all the foreclosed properties hitting the open market housing prices are going to tank big time.

So do make accomodations and you forego the increased interest rate and fees guaranteed by the original mortgage docs and keep people making payments, or do you raise rates and impose fees knowing that it will trigger lots of foreclosures and end monthly payments?

Gonna be a sticky wicket --especially since all our foreign currency holders are looking for an interest rate increase or they will convert dollars to other currencies and get out.

[yella_dawg]

11. It's not just the fed.

Central banks worldwide are rushing to slap bandaids on the subprime fiasco, I guess in hopes of staunching the bleeding before the near-prime and prime loans hit peak failure during the next twelve months. I see panic wherever I look, and in my opinion, for good reason.